Knowledge that Transforms

The permanent income hypothesis implies that, for any cohort of people, inequality in consumption and income should grow with age, a prediction that is here confirmed using data from eleven years of household survey data from the United States, twenty-two years from Great Britain, and fourteen years from Taiwan. In the permanent income hypothesis, the increase in inequality reflects the cumulative effect of luck on consumption. Other models of intertemporal choice--such as those with strong precautionary motives or liquidity constraints--can limit or even prevent the spread of inequality, as can insurance arrangements that share risk across individuals.

This paper studies top executive turnover and compensation, and their relation to firm performance in the largest Japanese and U.S. companies. Japanese executive turnover and compensation are related to earnings, stock returns, and performance measures. The fortunes of Japanese top executives, therefore, are positively correlated with stock performance and current cash flows (or with factors contributing to such performance). The relations for the Japanese executives are generally economically and statistically similar to those for their U.S. counterparts. There is some evidence, however, that the fortunes of Japanese executives are more sensitive to low income but less sensitive to stock returns than those of U.S. executives.

The authors examine survival rates of entrepreneurial enterprises and their growth, conditional on surviving. Their focus is on whether liquidity constraints increase the likelihood of entrepreneurial failure. The empirical strategy is based on the following logic: If entrepreneurs cannot borrow to attain their profit-maximizing levels of capital, then entrepreneurs with substantial personal financial resources will be more successful than those without. The authors examine the behavior of a group of sole proprietors who received substantial inheritances. The results are consistent with the notion that liquidity constraints exert a noticeable influence on the viability of entrepreneurial enterprises.

A model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives. I examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics. It is found that volume is positively correlated with absolute changes in prices and dividends. I show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns. I.

There is evidence from several sources that one cannot treat many-person households as a single decision maker. If this is the case, then factors such as the relative incomes of the household members may affect the final allocation decisions made by the household. We develop a method of identifying how ''incomes affect outcomes'' given conventional family expenditure data. The basic assumption we make is that household decision processes lead to efficient outcomes. We apply our method to a sample of Canadian couples with no children. We find that the final allocations of expenditures on each partner depend significantly on their relative incomes and ages and on the level of lifetime wealth.

This paper explores the dynamics of state taxes and spending during the late 1980s when regional economic downturns and increased expenditure demands led to substantial state budget deficits. More restrictive state fiscal institutions, such as 'no-deficit carryover' rules and tax and expenditure limitations, are correlated with more rapid fiscal adjustment to unexpected deficits. Political factors are also important. When a single party controls the state house and the governorship, deficit adjustment is much faster than when party control is divided. In gubernatorial election years, tax increases and spending cuts are both significantly smaller than at other times.

The authors propose a theory of economic development in which technology adoption and barriers to such adoptions are the focus. The size of these barriers differs across countries and time. The larger these barriers, the greater the investment a firm must make to adopt a more advanced technology. The model is calibrated to the U.S. balanced growth observations and the postwar Japanese development miracle. For this calibrated structure, the authors find that the disparity in technology adoption barriers needed to account for the huge observed income disparity across countries is not implausibly large.

The authors interpret historical evidence in light of a repeated-game model to conclude that merchant guilds emerged during the late medieval period to allow rulers of trade centers to commit to the security of alien merchants. The merchant guild developed the theoretically required attributes, secured merchants' property rights, and evolved in response to crises to extend the range of its effectiveness, contributing to the expansion of trade during the late medieval period. The authors elaborate on the relations between their theory and the monopoly theory of merchant guilds and contrast it with repeated-game theories that provide no role for formal organization.

This paper analyzes a model in which individuals care about both consumption (intrinsic utility) and social status. Status depends on public perceptions about an individual's predispositions rather than on the individual's actions. However, since predispositions are unobservable, actions signal predispositions and therefore affect status. When status is sufficiently important relative to intrinsic utility, many individuals conform to a rigid standard of behavior, despite heterogeneous intrinsic preferences. When status is relatively unimportant, no conformity emerges. The model produces both customs and fads, and it suggests an explanation for the development of multiple subcultures with distinct norms.

This paper integrates game-theoretical and sociological concepts to conduct a comparative historical analysis of the relations between culture and institutions. It indicates the importance of culture, and in particular cultural beliefs, in determining institutions, in institutional path dependence, and in forestalling intersociety successful adoption of institutions. Examination of institutional change in two premodern societies from the Muslim and the Latin worlds yields that their distinct institutional structures resemble those found by social psychologists to differentiate contemporary developing and developed economies. This suggests the historical importance of distinct cultures and the related societal organizations in economic development.